One of the first questions I get from a first time homebuyer is “Why do I need to get a pre-qualification from a lender before we go look at houses? Is it really necessary?”
The short answer: YES!
The why behind: Our standard Arizona purchase contract (section 2a) states that “an AAR Pre-qualifiction Form IS attached” with the offer. Therefore, in order to abide by the conditions of the purchase contract, we need to have the pre-qualification form in hand and ready to include with the offer.
However, if we look at the pre-qualification form on line 3, you will notice that there is an option to check a box that states “Buyer has NOT consulted with a lender”. So, technically, you could include this form, checking the box indicating you have not spoken to a lender, and that would meet the condition of the purchase contract. To quote almost every mother everywhere: Just because you CAN do it this way, doesn’t mean you SHOULD do it this way.
Your ultimate goal is to purchase the home, correct? In order to do that we need to make a strong enough offer to get the Seller to at minimum play ball with us and start negotiating. Put yourself in the Sellers’ shoes for just a moment. Would you want to negotiate with a buyer who hasn’t even talked to a lender yet and you have no idea if they can even qualify for any loan let alone the amount needed to purchase your home? No way would you take that offer seriously! You would move on to the next offer without hesitation, especially in a seller’s market like we are currently experiencing.
I always encourage my clients to take it even a step further. Technically you can get pre-qualified with just a verbal explanation of your income, assets, and debts which may or may not include a credit check. This would be indicated on the form and we are good to submit an offer on the house of your dreams. But what if we could make your offer look even better? What if we could show you are truly vested in buying this house without having to offer more money or reduce our concessions? We can do that by showing the Seller that you are not only pre-qualified, but have already provided your income documents to the lender and received a pre-approval.
What’s the difference? These days many people and even lenders will use the two words interchangeably. However, the technical difference is that a pre-qualification is a verbal discussion with the lender whereas a pre-approval includes a credit check and also providing most if not all required income documents to the lender.
Put yourself in the Sellers’ shoes one more time for me. Now suppose you receive an offer with the form indicating that the potential buyer has already had a credit check and turned in documents to the lender. Suppose you have two exact same offers but one is pre-approved by a lender, the other is only pre-qualified. Wouldn’t you want to play ball with the one that is pre-approved knowing that buyer has already put some skin in the game so-to-speak? Absolutely you would take the pre-approved buyer more seriously!
I know what you are thinking. Why on Earth would I do that? I know what my income is and a verbal explanation to the lender is enough. Well after several years working as a mortgage banker, I can tell you that the lender will calculate your income differently from what you will calculate. If you are not a straight salaried ,W2 employee in the same position with the same pay at the same employer for the last documented 2 years or more, then your income according to the lender may very well be lower than what you say it is. Why? Most lenders want to see a 2 year history of the same income amount. If you have hourly pay that varies on each paycheck, commission, bonus, overtime pay, have changed positions and/or employers, have unreimbursed employment expenses, rental properties or other deductions on your tax returns, or are self-employed (or 1099 income) the lender will take that into consideration and may not count your income as high as you think it is.
We don’t want to get under contract only to find out that you can’t qualify for the loan. You don’t want to waste your time, your money (on things like inspections), or get your hopes up on a property that you ultimately will not be able to buy due to not getting a loan approval. Taking a little extra time to get a few documents to the lender in the beginning to really analyze your income and get you a pre-approval versus just a pre-qualification, can save you a lot of time, money, and headache later on – and the bonus is that your offer is now that much stronger!
I’ve compiled a list of the most commonly requested documents from lenders to assist you in getting your pre-approval started:
- Most recent 2 years signed personal federal tax return (all pages and schedules)
- Most recent 2 years w2’s / 1099’s
- Most recent 2 years year-end paycheck stub (if you have commission, bonus, or considerable overtime pay)
- Most recent 30 days paycheck stub(s)
- Letter of explanation for any changes in your income over the past 2 years
- Most recent 60 days bank statements / asset statements
Note: These are just the most commonly requested income documents, your specific income source and the lender you use will likely have a few more as well.
As always, I’d love to answer any questions you have or go into more details. Feel free to contact me for additional information.